Kathmandu. KATHMANDU: The Stock Brokers Association of Nepal (SEBON) has made more than a dozen recommendations to the Securities Board of Nepal (SEBON) for its Margin Trading Facility Directive-2082.

The board had requested on November 22 to give suggestions for the Directive on Margin Transaction Facility-2082 within 7 days. The association said it made the recommendation to the board on Sunday.

The association has said that it has given necessary suggestions to manage margin trading. The association reminded that the Margin Transaction Facility Directive, 2074 was implemented earlier.

It also reminded that although some member brokers want to use it, it is not possible to implement it at present due to some practical difficulties, some technical difficulties and due to the problem of resources to provide margin facilities.

Still, the association said it has submitted suggestions on some issues with serious difficulties on the part of brokers.

Here is the association’s suggestion:

1. The issue is how to manage the investment amount required for margin trading by member brokers. In this, the main issue we are raising is that when there is a system of mobilizing loans by keeping the shares taken from the customers as collateral in banks and financial institutions, the risk is shared and the source is also properly managed. Similarly, we suggest that margin trading can be a stronger legal basis if it comes through regulations rather than guidelines.

2. The Securities Board of Nepal (SEBON) is required to issue a directive to CDS & Clearing Limited to fix the securities or amount required to recover the margin loan liability of the margin broker and to freeze the assets in case of any investigation or action by the customer’s family, heir, other regulatory body, investigating agency, office court or government and freeze the assets. Apart from this, we have also made some suggestions.

In Directive No. 3, point 3 (c) of Directive 2082 relating to margin transaction facility states that dividend has been distributed for 2 years in the last 3 years, it is necessary to insert the word ‘dividend has gone to profit as the provision of dividend is not practical’.

Point No. 3 (d) needs to be replaced with a sentence “The transaction has been completed in at least 180 days after the issuance through the initial public offering”.

In lieu of point (c) of Directive No. 4, it is necessary to insert the words “received by the deposit member or invested by the deposit member by opening a company”.

In lieu of point (1) of Directive No. 6, it is necessary to mention that “the securities broker shall take the minimum percentage of the market value of the shares of the listed corporate body as per Schedule-1 as the initial margin from the investors.”

Instead of (3) point of Directive No. 6, “The valuation of the shares taken as initial margin and the shares purchased under the margin facility shall be done on a marked-to-market basis in real time.” However, no additional facility will be allowed on the basis of the increase in the price of the shares. ”

In lieu of point (1) of Directive No. 7, “It shall be the duty of the customer to maintain the maintenance margin required on the shares purchased by the investor under the margin trading facility due to changes in the market price of the shares.” If this is not completed, the stock broker will have to make a margin call to the investor on the same day. ”

In lieu of point (2) of Directive No. 7, “After making a margin call pursuant to sub-section (1), if the required margin is not maintained before the commencement of the next trading day, the stock broker may sell the shares purchased under the margin transaction facility having regard to the market conditions and risks.” ”

In lieu of point (5) of Directive No. 7, “Notwithstanding anything contained in this Section, if the investor fails to maintain the maintenance margin, the securities broker may take from the investor a margin equal to the amount required to maintain the margin as collateral of the transaction securities.” When calculating the value of the shares, only the 180-day weighted average price or 70% of the market price, whichever is lower, should be calculated. ”

In lieu of point (1) of Directive 8, “A securities broker may provide margin transaction facility by taking loans from his own sources, from banks and financial institutions or by taking unsecured loans from his shareholders or directors or from high networth persons or institutions.”

However, a securities broker shall comply with the provisions of the prevailing company laws while borrowing unsecured loans from shareholders or directors or from individuals or institutions having high net worth. ”

In lieu of (2) of Directive 8, “The unsecured loan taken by a securities broker practitioner by taking a loan from a bank or financial institution or with its shareholders or directors or with a person or institutions having high net worth to facilitate margin transactions shall not exceed 5 times the net worth of the securities broker.” Provided that, other loans taken by securities brokers from banks and financial institutions as per the need shall not be counted in this. ”

An additional (4) point should be added to Directive 8: “A securities broker shall have to manage resources from the banks and financial institutions to provide margin trading services and for that purpose, if the bank or financial institution seeks collateral, the bank and financial institution may write off the required quantity of securities out of the total amount of shares held in the margin trading account of the customers purchased under the margin trading facility । ”

In lieu of Directive 9 (1), “A securities broker may provide margin trading facility up to ten times of his or her certified net worth.” Further provisions in this regard shall be as prescribed by the stock exchange. ”

In lieu of Directive 9 (2), “A securities broker may provide margin trading facility to a client and members of his or her household within a maximum of 25% percent of his net worth or a maximum of Rs. 100 million, whichever is less.” ”

Instruction 13 should be replaced by

(1) Subject to this Directive, securities brokers shall formulate and enforce necessary procedures in such a manner as to uniformize the activities to be carried out under margin transactions and facilitate margin transactions by the stock exchange.

(2) The following matters shall be kept to a minimum in the procedures to be issued by securities brokers and securities exchanges pursuant to Sub-section (1):

(a) Regarding the process of granting and renewing consent along with the documents required while granting consent to securities broker dealers who wish to operate margin trading service,

(b) Classifieds shares that can be traded under margin transaction and the margin thereof,

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(c) Regarding the minimum features to be maintained in the transaction system required to conduct margin transactions,

(d) The rate of interest to be provided for raising the source of funds required for the operation of margin transactions,

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(e) Procedures for Identification and Reliability Testing of Investors Seeking Margin Trading Services,

(f) Regarding the process of making real time mark to market and daily mark to market under margin transactions,

(g) Maintenance margin calculation and method of making margin call,

(h) Regarding the method of obtaining the maintenance margin according to the margin call,

(i) Provision for the sale of shares in case the maintenance margin is not received in part or in whole as per the margin call,

(j) Regarding the operation and supervision of margin transactions by a securities broker in making margin transactions,

(f) Regarding the maximum limit for obtaining and operating a single customer margin facility,

(g) Arrangement of transaction account and beneficiary account required for the operation of margin trading service,

(h) Regarding the purchase and sale and settlement of margin transactions made under margin transaction service and to operate margin trading services by taking loans by pledging the shares of the beneficiary account with a bank financial institution or non-banking financial institution,

(i) Regarding the operation of margin service by borrowing loans from shareholders, directors and high-net-worth investors, other than bank financial institutions,

(j) Determination of the limit for charging interest from the customers under margin trading service,

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(k) Regarding the details of the necessary documents that the securities broker can ask for from the clients in order to operate the margin trading service,

(l) Format of agreement to be entered into between a securities broker and an investor,

(m) Regarding the policy to be adopted for diversification of investment while facilitating margin transactions,

(3) Except for the foregoing, the stock exchange may, with the approval of the Board, modify and amend the procedures as per the requirements of the participants under the margin trading service.